There are several advantages to borrowing money to finance your business:
- Control of your business - unlike equity investments, when you take out a loan for your business you do not have to give away a part of your business in exchange for the money. You remain owner of your business and can make all the major decisions yourself
- Profits - in addition to not having to give away any shares of business, you will not have to share your profits with your lender, but rather can keep them for yourself
- Interest can be a business expense - though you will have to make interest payments in addition to the principal payments for a loan, those interest payments can generally be written off as business expenses when it comes to doing your business taxes
Why Would I Not Want Take Out a Loan for My Business?
There are several important factors to consider in terms of the possible detrimental consequences of taking out a business loan, especially if your business is not growing as fast as you had hoped:
- Consistent repayments - when you take out a loan you are going to have to make principal payments as well as interest payments on a regular basis. This applies whether your business is experiencing growth or loss
- Security for the loan - usually when you take out a loan for your business the lender will ask for the deed to part of your business property as security in case you are not able to fully pay back the loan. If your business starts to slow down an you are not able to make the loan payments on a regular basis, part of your business could be taken from you by the lender just when you need it most
Why Would I Want to Raise Money for My Business through Equity Investors?
You may decide that a loan may not be right for financing your business, and that having others invest in your business is a better method. There are a few advantages to raising money through investors:
- Unlike a loan, you do not have to pay back the initial investment of your investors
- Investors usually have business experience and can provide good advice and support for your business
Any Reasons I Would Want to Avoid Using Equity Investors?
There are some downsides to equity investment for raising money for you business:
- You have to compensate investors with a larger share of your profits
- You have a responsibility to others to run you business in an ethical and reasonable manner, and you may be sued by investors if you fail to do this
Which Way of Financing My Business Would Be Best for Me?
The general rule is that if you have a start-up business, you are better off financing it through equity investments since you will usually only have to pay back your investors if your business makes a profit. However, if your business already makes enough money to allow for a regular repayment schedule, loans may be better for you. You may want to get the advice of a tax attorney as well. Your tax attorney can let you know what the tax implications are for either type of financing method, and let you know which may be most beneficial for saving on taxes.